Orphan Drug Tax Credit Clarification Needed

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Background:

More than 20 million Americans suffer from one of over 5,000 rare diseases and medical disorders. Often, patients suffering from one of these debilitating diseases have no available treatments or options.

Recognizing this dilemma, the Congress enacted the Orphan Drug Tax Credit in 1983 in order to encourage biotechnology and pharmaceutical companies to develop therapies for rare diseases and conditions that affect 200,000 or fewer patients. The credit, which was made permanent in 1996, applies to 50% of qualified clinical trial expenses incurred with respect to designated orphan drugs. By reducing the costs of developing drugs for small patient populations, the credit allows companies to develop products that would otherwise be commercially unfeasible. It is universally recognized as one of the most cost-effective, non-bureaucratic programs enacted by Congress.

Problem:

The Orphan Drug Tax Credit only applies to qualified clinical trial expenses that are incurred after the U.S. Food and Drug Administration (FDA) officially designates the drug as an "orphan." FDA designation of an orphan drug can take up to a year and often delays the onset of clinical trials and therefore patient access to new treatments. Many companies, especially small biotech firms, must wait for orphan drug designation before initiating their clinical trials in order to obtain the full benefit of the credit and minimize the effective cost of developing the product. Starting clinical trials before orphan drug designation would make products available to patients earlier, but needlessly increases costs by denying the tax credit for otherwise eligible expenses. Small companies developing products with limited commercial value can seldom afford to do so.

Proposal: Clarify that the Orphan Drug Tax Credit applies to qualified clinical trial expenses for a designated orphan drug, regardless of whether such expenses were incurred before or after the product received such designation, provided that such designation has been received.

Legislative History: This proposal is included in the President's F.Y. 2004 budget. In this Congress, it passed the House as a provision in H.R. 1308, "Tax Relief Simplification and Equity Act of 2003". This provision has a long history of bipartisan support. It passed the House on July 25, 2002 as part of H.R. 4946, the "Improved Access to Long-Term Care Act of 2002," which died at the end of the 107^th Congress. It was also included in H.R. 4577, "The Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations, 2001", which passed the Senate on July 10, 2000. It was part of H.R. 2488, "The Financial Freedom Act of 1999" which was vetoed on September 23, 1999. Finally, this provision was also included in H.R. 2990, "The Patient Bill of Rights", which passed the House on October 6, 1999.

Conclusion:

Patients suffering from the more than 5,000 devastating, rare diseases are desperately relying on the biotechnology industry to speed the search for new cures and treatments. Clarification of the tax credit will provide a critical incentive to many small biotech companies to accelerate their development of therapies for small patient populations afflicted by some of the most debilitating rare diseases.

Additional Information:

BIO represents more than 1,100 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology products.

For more information, please contact Sharon Cohen at (202) 962-9200 or scohen@bio.org.

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